CAPITAL GAINS, POLITICAL LOSSES

By Rowl, Evans and Robert NovakBy Rowl, Evans and Robert NovakDecember 24, 1990

George Bush's apparent retreat from a capital gains cut, his latest abandonment of a 1988 campaign pledge, came in an offhand comment that pointed up disorientation in his White House at mid-term.

President Bush was actually contradicting his administration's official line that no decision had been made whether to press lower capital gain rates to perk up the economy. When asked at a meeting with regional reporters, he relayed what his own secretary of the Treasury had told him: The new budget agreement not only broke his no-new-taxes pledge but makes it impossible for him to fulfill tax cut promises.

Bush aides were promptly smacking their foreheads. Prematurely, the president had let out the unhappy truth without any cosmetic gloss to soothe the sting. But it was not the arcane complexities of the budget deal that jettisoned capgains. Once again, Bush had gazed into the eyes of Senate Democratic Leader George Mitchell (Maine) -- and blinked.

What has happened to capital gains is a metaphor for the decline of the administration itself. Little more than two years ago, a clear bipartisan majority in each house of Congress was supporting the need to reduce the tax on capital. Now Bush has, say his own aides, all but closed the window on the proposal -- testimony to disorder in the White House.

Secretary of Housing Jack Kemp intends to keep pressing for capgains as an economic imperative. Vice President Dan Quayle, within the uncomfortable strictures of his office, is a capgains advocate, as is his chief of staff, William Kristol.

They should be natural allies of presidential Chief of Staff John Sununu, who as recently as his Dec. 11 National Press Club speech said, "I have a feeling" that reduced capgains "will be very much a part" of the president's package. But Sununu is furious with Kemp for opposing Bush on the budget deal. With characteristic vigor, Sununu accused Kristol last week of leaking disagreements inside the White House.

While the tax-cutters quarreled, their foes prospered. Budget Director Richard Darman, ever avowing desires to cut capital gains rates, is reported by colleagues determined to keep that passion out of his budget for next year. Treasury Secretary Nicholas Brady never has disguised coolness toward what is supposed to be the president's principal tax proposal.

It was, aides say, a briefing by Brady that led to the president's remarkable comments to the regional reporters Dec. 18. While asserting his own belief "capital gains would be stimulative and not costly to the taxpayer," Bush said the budget deal requires either the Congressional Budget Office or the Joint Congressional Tax Committee to estimate tax losses from a capgains cut, which then would have to be made up by tax increases elsewhere. The turgid budget language, in fact, gives Darman's Office of Management and Budget final responsibility for the estimating.

Sununu has insisted there is nothing in the budget deal, which he has heroically defended, to block a capgains cut. But Treasury tax experts sing a different song. They see the budget deal foreclosing any tax cut into the indefinite future.

This is no mere disagreement in reading arcane budget scrolls. Even Bush advisers considerably more enthusiastic about cutting capital gains rates than Darman and Brady are waving the white flag. They flinch at entering once more into what they call the "rich man, poor man" cross-fire. After Mitchell's tenacity blocked capgains cuts in 1989, he seized the ideological high ground last year. "We have already lost that fight, and we don't want to lose all over again," a senior White House aide told us.

The offer from House Ways and Means Chairman Dan Rostenkowski (D-Ill.) is not to press his millionaire's tax if Bush forgets capital gains. The Wall Street Journal reported last week that the president had assured the chairman that capgains indeed would not be in the budget. That was flatly denied by Sununu, who told us: "Capital gains is still in the picture." But senior aides say Darman will make sure it is not.

The deeper problem is that the Bush administration may have lost not only the will but the reason to fight. Addressing the regional reporters, the president referred to "a $300 billion budget deficit" as an enormous stimulant. Domestic policy adviser Roger Porter instructed the journalists that the deficit is so stimulative that no further anti-recession action is needed.

Since the Bush administration seems to have traveled backward in time a generation to swallow discredited maxims of Keynesian deficit stimulation, it may soon get its wish. Thanks to a recession unchecked by lower capital gains rates, the Treasury whispers that the deficit for December will exceed all forecasts. Darman's budget deal helps block tax cuts that might help, but it cannot impede the budget deficits that do not.